Tax Treaty Question

Apr 30, 2012 1 Replies
L

In Publication 901, U.S. Tax Treaties, on page 8 it is written that a resident of Israel employed by an Israeli company is exempt from US tax if he is in the US for a few days on company business, and his income during the stay is paid for by the foreign company and subject to foreign income tax. I have two questions:



1) Does this also apply if said employee is a US citizen? I thought that it did not.
2) By "exempt" does it mean that it need not be included in the $92,900 foreign income exemption and that neither that income nor the foreign tax on it involved in Form 1116 calculations?
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A

Article 6, paragraph 3 of the treaty contains the "savings clause." This gives the right to each country to tax its citizens as if the treaty did not exist. Article 6 paragraph 4 has the exceptions to the savings clause. There is no exception for dependent or independent personal services. Therefore, the answer to Q1. is that a US citizen is subject to tax on the dependent services income and thus the statement does not apply to a US citizen. The US citizen is free to take advantage of any of the exclusions, deductions, or credits to avoid double taxation.

Q2. The use of the word exempt in the cited paragraph means that an individual who is not a US citizen or US resident alien or US National does not have to declare the income on a US tax return if the individual passes the number of days test.

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